(John Kemp is a Reuters market analyst. The views expressed are
By John Kemp
LONDON Jan 14 California's oil industry is
being hit harder than any other state by falling prices because
of the comparatively poor quality of its crude and its aging
The number of active drilling rigs in the state has more
than halved since June 2014, from 48 to just 21, according to
oilfield services company Baker Hughes (link.reuters.com/ruz73w).
The California rig count is the lowest since October 2009,
when producers were struggling with low prices in the aftermath
of the global financial crisis and deep recession that began a
California's high-cost and low-productivity oil industry has
always been vulnerable to falling prices and exhibits deep
especially cycles in activity rates.
It is still the third-largest oil producing state in the
union, producing almost 560,000 barrels per day, according to
the U.S. Energy Information Administration.
Oil fields in the Los Angeles Basin and around Bakersfield
in Kern County were once among the largest and most productive
in the United States.
But the state's output has been steadily declining since
1986. Unlike other major producing states such as Texas, North
Dakota and Oklahoma, the shale revolution has bypassed the
California's very mature fields produced 3 billion barrels
of water and just 200 million barrels of oil in 2012 - 15
barrels of water for every barrel of oil - according to state
Most of the oil is heavy and viscous. More than half of
state production, including big fields like Kern River, Belridge
and Midway-Sunset, has an API gravity of 20 degrees or less.
In 2009, California operators had to inject 500 million
barrels of steam and almost 1.4 billion barrels of water into
declining fields to maintain pressure and improve flow to
produce just 230 million barrels of oil.
The state has around 35,000 stripper wells which produced on
average just 3.4 barrels per day each in 2012. These highly
marginal wells accounted for 116,000 barrels per day of the
state's total output, more than 20 percent of the total,
according to the Interstate Oil and Gas Compact Commission.
Posted prices for Midway-Sunset, Belridge Heavy and Kern
River crude have fallen to $38, $34 and $34 respectively, down
almost two-thirds from an average of $100, $97 and $97 in June
2014, according to bulletins from Plains Marketing.
The result has been a huge drilling crunch, with rigs idled
and crew layoffs.
Ensign Energy Services issued Worker Adjustment and
Retraining Notification (WARN) letters about possible layoffs to
700 employees in Bakersfield in mid-December.
Ensign told the Calgary Herald newspaper subsequently: "We
are not exiting California. Just looking at the low oil price
environment we're in, we're anticipating there will be less
demand for drilling services in the future, hopefully not, but
we don't know."
"If there is a possibility (of layoffs), under California
law, we have to put them on notice that a number of people could
be affected," the company said ("Ensign source confirms warning
of possible layoffs in California" Jan 2).
The state's fields are all conventional rather than shale
plays and mostly very old so decline rates are slow. Production
did not surge in 2010-2014 and for the same reason it is
unlikely to collapse now even if drilling rates decline. The
drilling slowdown will not contribute much to the rebalancing of
the global oil market.
But the price collapse has killed off plans to frack in the
state's giant Monterey shale formation. It illustrates the
intense financial squeeze on all high-cost low productivity
producers across North America as prices tumble.
(Editing by William Hardy)